Sometimes important lessons can come from unusual locations. The experience of the US Forest Service has much to teach the Federal Reserve. Will they learn the lesson?
Our featured property is a three-bedroom property in Irvine for under $250,000. How the mighty have fallen…
Asking Price: $247,900
Address: 46 Eagle Point #25, Irvine, CA 92604
{book1}
Burning Down The House — Talking Heads
Hold tight wait till the party’s over
Hold tight were in for nasty weather
There has got to be a way
Burning down the house
Outwardly, the Federal Reserve and the US Forest Service seem to have little in common. The Federal Reserve manages our currency and banking system while the US Forest Service manages public lands in national forests and grasslands, which encompass 193 million acres, according to their website. Nevertheless, they both manage complex systems and the outcomes of their choices are commonly obscured for many years.
Our economy, which is the responsibility of the Federal Reserve, is a collection of interrelated individuals and entities whose behavior impact the system. These participants are also reacting to the system, and thereby they are impacted by it. Our forest ecosystem, which is the responsibility of the US Forest Service, is a collection of interrelated plants and animals that both impact the system and are impacted by it.
Both complex systems under management by these two agencies are unpredictable and difficult to manage effectively. Oftentimes the results of management practices are not fully realized until decades after policies are put in place. The similarities between the missions of these two agencies and the nature of the problems they face make them analogous. Lessons learned by one agency can often be extrapolated to the other, and given the long timeframes in their system’s lifecycles, it is important to review and learn these lessons when they are presented.
What Lesson Did the Forest Service Learn?
For years the US Forest Service was dominated by timber production interests. It was a classic example of regulatory capture. The US Forest Service’s primary objective, and thereby its land management policies, favored timber production. Forest Fires were seen as an obvious threat to timber production, so policies of fire suppression were absolute: put out all fires as quickly as possible, and do not let anything burn. This was forest service policy for several decades.
To its chagrin, the US Forest Service discovered its policy was flawed. By not allowing small fires to burn, leaf litter and other combustible natural growth accumulated. In unmanaged forests, periodic fires eliminate this source of fire fuel. In managed forests this accumulation of fuel fosters fires that get out of control (think Yellowstone).
To combat the accumulation of fire fuel, the US Forest Service changed its policies. Now, small fires in the understory are permitted to burn. By eliminating the excess fuel, the more dangerous and costly canopy fires are avoided. A few trees may get damaged in the small fires, but the forest survives.
What Can The Federal Reserve Learn from the Forest Service?
The interests of the timber industry to the US Forest Service are similar to the interests of Wall Street and other financial market participants to the Federal Reserve. The policy of the Federal Reserve is to stimulate the economy—to put out the fire with lower interest rates—every time there is an economic slowdown.
This policy became known as the “Greenspan Put” during the 20 years of Alan Greenspan’s tenure as Federal Reserve Chairman. This policy pleases business interests, and for many decades, it can look like a sensible policy.
There is a major problem with the “Greenspan Put” policy of stimulating the economy through artificially lowering interest rates. Just like the accumulation of fire fuel on the forest floor, our economy accumulates unsound business plans, Ponzi Scheme financing arrangements, idiotic investment strategies, and behavioral moral hazards. Recessions are supposed to be the small fires that destroy these destructive agents, but when the Federal Reserve manipulates interest rates and stimulates the economy, recessions are not allowed to serve their purpose, and the economic problems pile up.
Many have written that there is an 80-year cycle of economic activity that results in depression-like conditions. They speak of this as if it were a law of nature like the orbital period of Pluto. This is nonsense. The cycle of depressions—if we are to believe there is such a thing—is merely a calendar coincidence. There is no identifiable cause and effect between the passage of 80 years and the cause of an economic catastrophe.
It is my opinion that our problems are caused, albeit indirectly, by the manipulation of our financial system by the Federal Reserve. When our entire financial system gets out of control due to the build-up of unsound business practices—an accumulation caused by Federal Reserve policy—there is a tipping point where monetary policy cannot save the day. The fire burns down the financial house.
One of the functions of the Federal Reserve is to maintain stable prices and promote economic growth. It was formed out of a perceived need to smooth out the extreme economic cycles of boom and bust of the 19th century. Like it or not, it is probably not going away (although many would like it to.) The question they are going to have to wrestle with is how to smooth out the ups and downs without creating the conditions that send the economy careening out of control like it is now. I am not qualified to provide those answers, but in their quest for solutions, I hope the brain trust at the Federal Reserve looks at how the US Forest Service manages a similar problem. They may find guidance in this unlikely location.
{book3}
BTW, did any of you watch the interview with Ben Bernanke on 60 Minutes last night? (part 2 is here) It was very interesting.
I watch the new show Lie To Me on Fox too much. When I watched Bernanke talking, I kept seeing this nervous twitch in his face and lips. Maybe he was nervous because he was on 60 Minutes, but he is in the public eye, so he has been on camera before. Rather than fill me with confidence, it really frightened me to see our Federal Reserve Chairman so edgy when discussing our economy.
Today’s featured property is a crappy condo, but at $228/SF, it is the least expensive way to own a 3 bedroom unit in Woodbridge.
Asking Price: $247,900
Income Requirement: $61,975
Downpayment Needed: $49,580
Monthly Equity Burn: $2,065
Purchase Price: $402,000
Purchase Date: 9/30/2005
Address: 46 Eagle Point #25, Irvine, CA 92604
| Beds: | 3 |
| Baths: | 2 |
| Sq. Ft.: | 1,088 |
| $/Sq. Ft.: | $228 |
| Lot Size: | – |
| Property Type: | Condominium |
| Style: | Contemporary |
| Year Built: | 1978 |
| Stories: | 1 |
| Floor: | 1 |
| Area: | Woodbridge |
| County: | Orange |
| MLS#: | S567144 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 1 day |
 New Listing (24 hours) Fixer-upper
|
|
3 bedroom, 1 1/4 bath fixer upper. This end unit condo features newerappliances, large patio and inside laundry hookups. Located in the
master planned community of Woodbridge you can take advantage of the 22
pools, 24 tennis courts, and 19 park areas or relax by one of the 2
lakes and lagoons. Close to shopping, restaurants, and excellent
schools.
Check out the shadow on the inside photo. Did you see the biceps on the realtor? That dude is pumped up.
Notice this unit is not being pumped as light and bright…
This unit has all the appeal of owning your own apartment–which is none.
This property is a good example of how the lenders are getting clobbered. The dollar amounts involved are small because this unit is low end; however, the magnitude of the loss is tremendous. It is foreshadowing losses to come on nicer properties.
The property was purchased on 9/30/2005 for $402,000. The owner used a $321,600 first mortgage, a $80,400 second mortgage, and a $0 downpayment. Now that values have cratered, it is not surprising that she walked.
When the lender went to the foreclosure auction, they only bid $239,250, which is 25% off the amount of the first mortgage, and they still got the property. Nobody wanted it. The auction price is 40% off, and the current asking price is 38% off the original purchase price. We haven’t seen many 40% discounts in Irvine to date. We will see more.
{book2}
Watch out
You might get what you’re after
Cool babies
Strange but not a stranger
Im an ordinary guy
Burning down the house
Hold tight wait till the party’s over
Hold tight were in for nasty weather
There has got to be a way
Burning down the house
Burning Down The House — Talking Heads
New Listing (24 hours)
